Thursday, September 27, 2012

The government's newly found determination to push ahead with reforms has drawn ecstatic reviews from the media and businessmen. 'From fasting to feasting' is how one businessman is said to have reacted. Is the euphoria merited?

Well, neither S&P nor Moody's, two agencies the government must have had in mind when it chose to go on a reform offensive, are impressed. S&P has downgraded its growth forecast from 6.5% to 5.5%. Moody's says its rating will remain unchanged for now. So do the reforms make sense?

From a long term point of view, many of them do. You can't quarrel with a gradual alignment of petroleum prices with international prices. FDI in aviation should be ok. I am not very sure about FDI in retail, not having researched this matter well enough. But, I guess one can make out a case for a modern retail sector to exist with the traditional one.

Trouble is, these measures will not make a difference to short-term growth prospects. Whether you cut fuel subsidies are not, you are going to end up with a fiscal deficit for 2012-13 close to last year's figure of 5.9%. It is not just that subsidies are high or growing; tax revenues will not grow fast enough at the current GDP growth rate.

From the short-term point of view, we need to expedite ongoing projects. That should suffice to match last year's 6.5%. As for the medium term objective of growth of 8%, I am sceptical about achieving fiscal consolidation as a means to raising the growth rate. This did not happen earlier; it's difficult to see it happening now.

We had fiscal consolidation in 2004-08 because of a growth boom that was linked to the global boom. The challenge, therefore, is how do we raise the growth rate in the absence of a similar global boom. There has to be an indigenous growth impulse. This can only be enhanced public investment. I would say: disinvest in a big way and use much of it for public investment. That will boost growth, cause the fiscal deficit to fall and lead to a decline in interest rates.

Friday, September 14, 2012

I have had a chance to go through the CAG report on Coalgate. I believe that there are several flawed propositions in the ongoing controversy:

1. Coal blocks had to be allocated to the private sector because Coal India Limited (CIL) was inefficient.

Not true. CIL couldn't make progress with its exploration or mining because of environment and land acquisitions problems, lack of rail connectivity from mines, etc. For these very reasons, private operators have not been able to go ahead with the blocks allotted to them. CIL's track record over the years has been pretty good in relation to its internal targets.

2. Auction is the best route for selling natural resources.

The CAG has asked for competitive bidding in the case of coal. Private parties, however, would find it difficult to bid because of various uncertainties- you don't know about extractable reserves, coal quality, the cost of mining etc. That is why bidding for such resources involves royalty related to the resource extracted rather than a lump sump upfront payment. Perhaps, private players could have been asked to bid for a bundle of mines. But what if the projections are belied after allotment? The player may simply walk away from the mines instead of wasting more money.

Secondly, competitive bidding would tend to push domestic prices of coal up to the international price. This would wreak havoc on the power industry and end-users of power. (For this reason, scrapping the coal mine nationalisation is undesirable in today's situation). In principle, one could set the coal price as the bid parameter and seek the lowest bid. Again, what if the allottee found that the coal price to which he has committed is uneconomical? Or, if the low price caused operators to compromise on safety or resort to stripping coal in the shortest time? It may be better, therefore, to seek the highest bid price for a mine and expect to tax profits in the hands of end-users.

3. The government has lost Rs 185,000 crore in the allotment to private sector.

This estimate is based on several assumptions, notably the sale price and extraction cost of CIL (which latter may not apply to new players), and not discounting the stream of benefit. If you discount the flows, you arrive at a figure of Rs 58,000 crore, which too represents an upper limit.

4. The government should cancel all allotments made so far

This doesn't make sense if you accept that competitive bidding was not desirable and allocation was, therefore, inevitable. Allocations based on transparent criteria and where the allottees have made acceptable progress do not need to cancelled. Where allotments were clearly mala fide and allottees have been sitting on their allotments, cancellation is in order- and I imagine that is just what the government is doing.

Wednesday, September 05, 2012

The EU is planning legislation that will make it obligatory for member countries to ensure that, by 2020, 40% of directors on corporate boards are women, FT reports. As I have argued in earlier posts, I am all for gender diversity and, indeed, for diversity of every kind on boards.

Opposition is building up in the UK and the argument is a predictable one: it is better to find ways for women to move naturally up the ladder. But this won't happen any more than we will have better representation for SCs/STs through a natural process (of superior education, economic betterment etc). For these things to happen naturally would take another 100 years or so and, that too, with a lot of luck. There are entrenched prejudices. Equally important, women's need for motherhood could come in the way of their corporate careers. Also, their preference for soft skills, such as HR, instead of marketing and finance could prove something of an obstacle in the rat race. This preference, in turn, arises from women realising that being in areas such as HR can given them more flexibility in their careers and work schedules.

Schumpeter makes these points well in a recent article in the Economist:

Several factors hold women back at work. Too few study science,
engineering, computing or maths. Too few push hard for promotion. Some
old-fashioned sexism persists, even in hip, liberal industries. But the
biggest obstacle (at least in most rich countries) is children. However
organised you are, it is hard to combine family responsibilities with
the ultra-long working hours and the “anytime, anywhere” culture of
senior corporate jobs. A McKinsey study in 2010 found that both women
and men agreed: it is tough for women to climb the corporate ladder with
teeth clamped around their ankles. Another McKinsey study in 2007
revealed that 54% of the senior women executives surveyed were childless
compared with 29% of the men (and a third were single, nearly double
the proportion of partnerless men).Many talented, highly educated women respond by moving into less
demanding fields where the hours are more flexible, such as human
resources or public relations. Some go part-time or drop out of the
workforce entirely. Relatively few stay in the most hard-driving jobs,
such as strategy, finance, sales and operations, that provide the best
path to the top.

Thus, quotas are the only way to ensure greater gender diversity on boards.The contention that this will dilute 'merit' or 'quality' on boards is utterly laughable. The performance of boards everywhere is so pathetic that almost any change or innovation would be an improvement. One of the things about quota for women is that it will necessarily bring in people from outside the closed club in which boards now operate.

Perhaps the most important reason boards do badly is that there is not enough diversity of views or perspectives. Bringing in women will make some difference in this respect. To improve boards, bring in women and also bring in workers, minority shareholders and institutional shareholders- in short, anybody who is a stranger to today's charmed circle whose members think they need only to nod their heads and slap each other's backs.